The pessimistic sentiment that was emanating throughout financial markets as Wall Street closed yesterday has picked up momentum through the overnight session, with global equities bracing for another day of sharp losses as investors flock to perceived safe-haven asset classes. The catalyst for the pick-up in risk aversion stems from Chinese PMI numbers released overnight, which showed the official reading on purchasing manager activity in the manufacturing sector slipping below the boom/bust level of 50 with a reading of 49.7, the lowest level in three years. Despite the People’s Bank of China strengthening the yuan by the most in almost a year in order to stabilize liquidity conditions, the initial reaction to the disappointing PMI number has been for market participants to rotate out of high-yielding assets and into safe-havens. The Shanghai Comp finished its session lower by over 1%, while the cynicism in China spilled over into Japan where the yen has seen notable inflows from investors seeking safety, causing USDJPY to slide and the Nikkei to sink by close to 4%.
The recent rally in the hydrocarbon complex saw both WTI and Brent hit the afterburners yesterday, as a short-covering squeeze in the commodity propelled front-month WTI near the $50 handle before selling interest emerged. The big news to cross the headlines that jarred markets and led to a heavy bid tone in the commodity was a headline that OPEC was willing to talk to non-OPEC producers about establishing a “fair price.” Given the lack of independent verification and acknowledging the fact this would be a gross change in policy for the producer group, caution should be exercised when assessing the headline on face value. While it is plausible the Saudi’s underestimated the effects a reinforcement of OPEC’s current supply regime would have on the oil market, a capitulation now would come across as short-sighted. It seems far-fetched that as swing producers the Saudi’s would be the one’s wiling to fall on the sword and cut their own production, when a cut at this stage will likely have a greater incremental benefit to US shale producers who are more flexible to changing prices. There is still a “frack-glut” for US shale producers where uneconomical wells at current prices can ramp production back up as prices elevate, and therefore would undermine a coordinated supply cut unless the non-OPEC nations were on-board. Front-month WTI has eased off from yesterday’s rally to slide back beneath $49, though even with the 1% drop from yesterday’s close, WTI has rallied close to 30% in the last six sessions.
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